Dear Mr. Berko: I have a 2-year-old son and, for reasons I do not wish to discuss, I am out of his life forever.
He’s in a fine foster home, and I want to provide for his future without him knowing it.
I have $106,000 to invest, so I visited two brokers. Both recommended that I buy a variable annuity.
When I asked about mutual funds, each broker belittled the idea but for different reasons. Broker A insists that a variable annuity is “bulletproof against a market crash and inflation.” Broker B said that it was impossible to lose money in a variable annuity and that there were no commission costs to me.
Both of these men made sense, but they were so smooth and glib that I felt uneasy.
So, back to mutual funds: I won’t be able to monitor the investments. So would you recommend some mutual funds for a minimum 28-year period? My son will be 30 in 28 years, at which time the trust gives him control of the money. –D.P., Joliet, Ill.
Dear D.P.: When a prospect visits a brokerage for the first time, most brokers are quick to recommend variable annuities.
The sales commissions are fantastic, and the sales pitch can be mastered by anyone with a room temperature IQ. And while it takes a modicum of intelligence to recommend mutual funds or common stock, any half-wit, nitwit, dimwit or witless wit can choose from a list of five or six variable annuity carriers offered by his firm.
There are lots of variable policies, the majority of which are just plain average annuities with average results for which you must pay hugely above-average sales commissions: between 6 percent and 12 percent, plus additional fees of 3 percent to 4 percent every year on the value of your policy.
Anyhow, those brokesters have quicksilver tongues. A variable annuity is not bulletproof against a market crash or inflation; you can lose money, and you also pay a huge commission to buy a policy.
However, both brokers represent two good variable annuity carriers, so I suggest you consider investing $56,000 with Broker A or Broker B or $28,000 with Broker A and $28,000 with Broker B.
Ask each to clearly iterate all the benefits, penalties and guarantees on his firm’s letterhead stationery before you sign the contract. This iteration should be attached to the trust document so your son, at age 30, won’t have to spend a season of Sundays traipsing through a 250-page prospectus to understand what he owns.
Next, I recommend the following no-load mutual funds and invest $10,000 each.
Meridian Growth (MERDX, $47.26) is a $2.5 billion midcap growth fund run by Rich Aster, who has managed MERDX since 1984. He has a low 37 percent portfolio turnover, plus an excellent five- and 10-year average annual return of 8 percent and 11 percent.
Oakmark Global (OAKGX, $23.18) is a $2.5 billion large-cap growth fund that invests between 25 percent and 75 percent of its assets in non-U.S. companies. The five-year and 10-year average annual returns are 5.3 percent and 11.1 percent, respectively.
Fidelity Low-Priced Stock (FLPSX, $41.61) has a $35.6 billion portfolio with 885 different issues trading under $35 and has been managed by Joel Tillinghast since 1988. Its average annual return for five and 10 years is 5.1 percent and 10.9 percent.
FPA Crescent (FPACX, $28.32) is a large-cap blend fund, investing in stocks, bonds, convertibles and foreign securities. Its $6 billion portfolio turns more than 32 percent per year, and the five- and 10-year average annual return is 6.7 percent and 10.7 percent.
Finally, T. Rowe Price Emerging Markets Stock (PRMSX, $34.59) invests 80 percent of its $5.3 billion portfolio in the emerging markets of Africa, Latin America, the Middle East and Asia. It has a surprisingly low 26 percent portfolio turnover and a five-year and 10-year average annual return of 7.9 percent and 14.2 percent.
I still can’t predict where the Dow will be in the next 28 years, but these funds and the annuity will give your son better-than-average returns. If they average 6 percent per year, your son’s $106,000 investment could be worth close to a sweet $550,000.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at firstname.lastname@example.org